With nuke near death, consumers staring at $3B tab

By Dan McSwain5 p.m.May 4, 2013
[[http://www.utsandiego.com/photos/2013/apr/19/994541/][]] The San Onofre Nuclear Generating Station has been closed for 14 months after tube vibrations caused a leak of radioactive water. [U-T file] — Charlie Neuman

If utility executives pull the plug permanently on the San Onofre nuclear plant, the list of losers is long: consumers face nearly $3 billion in costs, the risk of blackouts will rise, and air quality will suffer.

Yet Southern California Edison, the giant utility that botched the nuke’s retrofit and caused its shutdown, seems remarkably confident that its investors will emerge relatively unscathed. Welcome to the great coin toss of regulated monopolies, where utility shareholders typically win on heads, and consumers lose on tails.

Given that Edison led the project that essentially installed faulty radiators in its nuclear reactors — after deciding to use an untested new design from a contractor — the odds for consumers may be better this time, in what’s shaping up as the biggest regulatory struggle in a decade.

The referee is the California Public Utilities Commission, which has an almost unblemished record of siding with utilities – and against consumers – in disputes about who pays for investments in generating electricity. But Gov. Jerry Brown appointed four of five commissioners. He may be susceptible to public pressure.

Meanwhile, the clear winners include the independent generators and Wall Street trading firms raking in surprise profits in Southern California’s generally depressed power market, as utilities spent $516 million last year just to buy the electricity to replace San Onofre’s lost output. SDG&E, which owns 20 percent of the plant, spent $72 million of that total.

And we are all safer with the plant shut down, given that its twin nuclear reactors are situated in one of the nation’s major population and economic centers. Experts argue about the level of risk of catastrophe, but there is a risk. People who’ve lobbied for years to retire San Onofre are feeling pretty good right now.

Last week Ted Craver, the CEO of Edison’s parent company, told investors that he is pondering whether to shut the nuclear plant down for good if federal regulators don’t quickly approve his engineers’ plan to restart one of the plant’s two reactors for five months at 70 percent power to see if it breaks.

“Without a restart of Unit 2, a decision to retire one or both units would likely be made before year-end 2013,” Craver said in a call with analysts.

This was very big news. It was the first time anyone at Edison has publicly discussed giving up on the crippled nuke, which until January 2012 provided 20 percent of San Diego County’s electricity supply.

But such shutdown talk was also bizarrely incomplete, for reasons that are clear to anybody who has depended on an old car and worried about the inevitable repair bills.

Let’s say the cooling system died, and you paid $1,000 to replace it. It was a tough decision, because the car was only worth $2,000 to begin with. Now the car has broken down again, and the mechanic says he doesn’t quite know how to fix it.

Should you tow it to the junkyard and buy another car? Or risk fixing it again? That answer has nothing to do with your last repair; it depends on how much the new repair will cost you – and Edison will say nothing publicly about how much it might cost to fix its nuke. It wants permission from the Nuclear Regulatory Commission to do some testing for five months, but it has no plan to fix its power plant, let alone give an estimate of the eventual cost.

A company spokeswoman said Friday that discussion of fixing the plant was “premature.” Yet her CEO is talking openly about permanent shutdown.

Here is where it becomes clear that utility executives are not like the rest of us. The incentives that govern regulated monopolies bear no resemblance to those for ordinary businesses.

For openers, fixing San Onofre and selling the power would bring zero profits to Edison or SDG&E. That’s because utilities simply pass on power costs — with no markup for profits — to customers on our bills, regardless of whether the electricity was purchased under a contract or generated by the utility itself.

Instead, utilities make their money based on the cash they invest to buy or build assets, such as power lines, smart meters and power plants. Right now regulators allow SDG&E to bill customers at a rate of 10.3 percent a year of its total assets, and Edison gets 10.45 percent.

That’s probably 1,000 times more than banks are paying to use your cash in a savings account, by the way. But regulators figure that utility investors need plenty of incentive to build and maintain the power grid. Here's the rub: Customers are supposed to pay only for assets that help provide electricity.

Strictly speaking, Edison and SDG&E have no financial interest in selling power from San Onofre. The question for executives is whether regulators will allow them to bill consumers the entire cost of what today is an expensive piece of industrial history on the Camp Pendleton beach.

That bill is high: $700 million and counting for installing the new steam generators in 2010 and 2011 that broke last year; over $1 billion in unfilled costs for the San Onofre plant itself; more than $1 billion in eventual replacement power costs, if the 2012 spending is any guide.

Those are just the direct cash costs. In a report set for release this week, state grid managers are expected to predict Southern California may have trouble keeping the lights on this summer.

And San Onofre’s shutdown equates to 9 million metric tons a year of additional CO2 in the air, because fossil fuels are filling the power gap. Someday green resources such as solar, wind and conservation will push down this figure, but that’s a long way off.

When Edison proposed replacing its steam generators in 2004, for an estimated $700 million or so to get 20 years of carbon-free power, the idea seemed like a “no-brainer,” at least from an economic perspective. At the time, the utility told regulators that upgrading just one reactor unit wasn’t worth the cost, because of the high fixed costs involved in running a nuclear plant.

But now, with no official plan to fix both units and an epic legal battle brewing over who pays for the debacle, it is clearly time to apply some more brain power — and share all that knowledge with the public.